AVGO, MXIM, ADI Among Those Primed to See Estimates Rise, Says JP Morgan

By Tiernan Ray

J.P. Morgan semiconductor analyst Christopher Danely today is the latest person calling for some upside in chip stocks based on an improvinginventorysituation and less demanding Street estimates.

Following an upbeat note last night from the semi team at UBS, Danely writes that estimates for calendar 2013 chip earnings per share declined by 7% during this last reporting season, which was worse than he expected to happen and worse than the 3% decline in 2013 estimates that took place during Q2′s reporting season.

The good news, he writes, is that “margins and inventory are close to the trough, and we continue to expect estimates to expand sharply once demand stabilizes.”

PC-related chip makers Advanced Micro Devices (AMD), Intel (INTC), and Intersil (ISIL) are the worst-positioned, he thinks, given that PC demand will not likely see much of a bounce this quarter despite Microsoft‘s (MSFT) Windows 8, which went on sale last month:

Demand from the PC end market remains weakest due to soft global demand and share loss to tablets. Looking to 4Q12, we do not expect Windows 8 to drive incremental PC demand as new operating systems have not driven a major PC refresh cycle since 1995. As a result, we expect soft PC demand to continue to weigh on AMD (90% of sales from the PC end market), INTC (85%), and ISIL (20%) in 4Q12.

As Apple (AAPL) and Samsung Electronics (005930KS) continue to suck the life out of other “handset foodchains,” the best chip companies to benefit from smartphones, he thinks, are those tied to those two ecosystems, such as Maxim Integrated Products (MXIM) and Avago Technologies (AVGO).

In addition to those two, what he describes as “high-margin/high-dividend and Apple-levered stocks have done well”:

We favor semiconductor stocks with the most upside to margins and EPS. We expect C13 EPS to rise 36% YoY on average for our stocks, with ON Semiconductor (ONNN) (143%), Fairchild Semiconductor International (FCS) (97%), Analog Devices (ADI) (20%), and Xilinx (XLNX) (18%) having the most growth.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.